Question

a stock is expected to pay the dividend of $1 per share in two months and in five months. the stock price is $50, and the risk-free interest rate is 8% per annum with continuous compounding for all maturities. what are the forward price and the initial value of a six-month forward contract on the stock?

Answer 1

The forward contract's initial value is 50.01 and its forward price is 1.9540.

Forward Contract: What is it?

A forward contract is a sort of derivative in which the underlying asset is sold at a defined price and at a later time. The contract includes the writer and the buyer as the two parties. Interest, currency exchange rates, metal, stocks, etc. are examples of the underlying asset in a derivative contract.

Given:

Dividend = $1 per share

Stock price = $50

Risk-free rate = 8% per annum

Present value of income from security= ( dividend X $e^{-risk- free interest rate X \frac{2}{12} }$) + (dividend X $e^{-risk- free rate X \frac{5}{12} }$ )

= ( 1 X $e^{-0.08 X \frac{2}{12} }$ ) + (1 X $e^{- 0.08 X \frac{5}{12} }$ )

= (1 X 0.98676) + (1 x 0.96722)

= 0.98676 + 0.96722

= 1.9540

Forward Price = (stock price - present value of income from security) X $e^{- risk - free rate X \frac{6}{12} }$

= ( 50- 1.9540) X $e^{-0.08 X \frac{6}{12} }$

= 48.046 X 1.041

= 50.01

Learn more about forward contract: brainly.com/question/15581105

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